After strong Q2, earnings upgrades likely for Bharti

In a seasonally weak quarter, company sees margins, data volumes increase

The ailing telecom sector seems to be coming out of the woods, going by the consistent improvement in Bharti Airtel's operating metrics. The company's second-quarter (Q2) numbers suggests competitive headwinds are down, driving both consumer stickiness and margin expansion. The firm has reported a monthly churn rate of 3.2 per cent (percentage of consumers leaving its network), which was 8.5 per cent last September. Increased consumer stickiness and higher margins have helped it report a 4.4 per cent sequential and 20 per cent annual growth in its consolidated operating profit at Rs 6,830 crore.

This improvement is not a flash in the pan, as the operating metrics have been improving for its wireless business in India for the past three quarters. Even as revenues from its India wireless business declined 2.1 per cent sequentially to Rs 11,350 crore, operating profit rose 1.1 per cent to Rs 3,800 crore quarter-on-quarter.

This was largely driven by a 110-basis point improvement in margins in the domestic wireless business. Voice revenue per minute grew from 36.4 paise to 36.7 paise sequentially. Bharti believes voice realisations can improve further going forward, as there is a wide gap between the headline tariff of 75 paise for incoming calls and the realised tariff.

Apart from the traditional voice business, the company has added 10 million new mobile internet users over the past year. The total number of consumers using mobile internet on Airtel's network stood at 50.6 million, of which only four million use 3G. Data usage per customer went up from 133 MB in Q2 of FY13 to 231 MB this year.

Kotak Institutional Equities believes the quarter provided ample data points to support a positive view on the India wireless business. Key metrics to note is the one per cent uptick in voice revenue per minute, margin expansion in a seasonally-weak quarter and sustained growth in data volume and revenues. After three troubled quarters, Bharti's Africa business has seen revenue and margin growth in the second quarter.

Despite operational gains, the firm's net profit fell 27.5 per cent sequentially and 29 per cent annually to Rs 512 crore, largely due to forex losses of Rs 342 crore. However, the September 2012 quarter also saw an exceptional one-time income of Rs 586 crore, because of an order awarded by the TDSAT in respect of an outstanding dispute pertaining to inter-connect agreements. Of this, Rs 238 crore flowed into the net profit, which is why Bharti's drop in profit must also be seen in light of this one-time payout.